Reports of the death of Internet advertising have been exaggerated. But its struggles suggest it will take longer than expected to realise its early promise

INTERNET advertising has a lot to answer for. Thousands of dotcoms saw it as a substitute for a business plan, a blithe answer to the question of how to make money from the traffic on free websites. It has polluted the top of millions of web viewers' screens, making an inch of valuable property a no-go zone of garish clutter. Oh, and it has largely failed, generating only measly returns for advertisers and publishers (see article). When the Internet bubble burst, investors saved the harshest punishment for dotcoms built on advertising, from Yahoo! to DoubleClick.

The immediate problem is simple: too many pages and too few advertisers. The number of pages on which to advertise is increasing along with overall Internet use. At the same time, the number of advertisers is falling as the most profligate of them—dotcoms, needless to say—pull back or go bust. As a result of this imbalance, the amount that remaining advertisers are willing to pay is falling, to as little as $1 per thousand views (a measure known as CPM), down from ten times that a couple of years ago.

Underlying this crisis are some fundamental problems. The view of web advertising circa 1999 has turned out to be mistaken. It was supposed to break through all that was weak and irritating about traditional advertising. It was accountable, because software could track which ads led to which sales. It was non-disruptive, meaning that, unlike TV and radio ads, it did not need to interrupt a viewer. It could be targeted, so that only the most likely prospective customers would see an ad, improving response rates. And it was entertainingly interactive, encouraging viewers to learn as much or as little about the products as they wanted to.

For most publishers, however, web advertising has proved less attractive than its offline equivalent. In print media, advertising rates tend to go up over time; online, they fall. Print advertisers pay for space whether anyone sees it or not, and the same ad typically goes to all readers, or at least to all those in a particular region. In contrast, web advertisers can pay to have their ads reach only those readers who view a particular page, or perhaps just those among them who are executives with high six-figure salaries. Unlike print advertisers, they need not pay for those they are not interested in reaching. Online publishers are, in effect, punished for the efficiency of their medium.

Each of the supposed advantages of online advertising has shown a dark side. Take accountability. The old cliché of the offline advertising industry is that you know half of your advertising will be wasted, but not which half. On the web the answer is only too clear: it is the half that generates the fewest clicks. As a result, advertisers increasingly insist on payment based on performance—measured either by clicks or actual customer acquisitions—rather than just ad “impressions” (viewings).

But if a viewer does not click on a banner ad, whose fault is it? Is it the publisher's, for having the wrong sort of readers or poor placement, or the advertiser's, for having a boring ad? Likewise for customer acquisition: the fact that a “click-through” does not turn into a client can mean that the viewer was the wrong sort of prospect, or that the advertiser has discouraged him with an off-putting pitch on its own site.

As a result, publishers that are being pushed to accept performance-based deals are increasingly forced to work with the advertisers, helping them to craft ads on their own site to get the best response. Aside from distracting media firms from their main business, this pushes them towards becoming business partners with their advertisers, blurring the usual arms-length relationship between media and advertising.

The notion that the online ad is non-disruptive also has a sting in its tail. Banners may not interrupt reading, but they are very easy to ignore: average click-through rates have fallen to less than one in 200, half that of the early days. As a result, advertisers and web publishers are adopting increasingly disruptive devices to keep their click-throughs up. For instance, many sites now feature infuriating “pop-ups”, advertising mini-windows that open on their own and will not go away until a viewer manually closes them.

If web ads were entertaining, the fact that they are increasingly distracting would be all right. But few go beyond crude slide shows, or just single slides. The blame for this lies mostly with the advertisers themselves. Getting Internet advertising right means creating lots of different, interactive ads that can be tested against each other and refined with up-to-the-minute monitoring of responses. That takes lots of money, time and effort. Yet the Internet market is not yet large enough for most advertisers to justify the expense. Five of the world's top ten advertisers, which collectively spend billions of dollars each year on traditional advertising, spent less than $1m each last year on online ads.

The result is a Catch-22: unless advertisers work harder to make more of the Internet, consumers will continue to reject most online advertising; but until consumers start clicking more, big advertisers will not spend much to improve their offerings. Today, three-quarters of web ads are still boring old banners, a format that has remained largely unchanged for more than six years. Most advertisers simply cannot be bothered to take advantage of more innovative styles—such as “skyscrapers”, which run vertically down the right side of the screen.

Customer targeting, too, has so far failed to deliver on its promise. The idea was compelling enough: if a publisher can match a viewer's interests with an ad, the clicks should take care of themselves. Advertisers have been willing to pay as much as a hundred times more for an well-targeted online ad than for blanket coverage.

But targeting turns out to be easier to talk about than to do. Although web publishers know far more about their readers than print publishers do, turning that into a clear picture of readers' wants and needs is difficult. Is somebody who clicks on a weather report a sportsman, a commuter or merely somebody with time to kill? Even if a publisher can guess that the viewer is, say, a fly fisherman, the odds are that it will not have that perfect fly-fishing ad to display. And even if it does, it cannot control what happens once the viewer clicks.

Despite all this, the long-term future of web advertising is promising. The problem is not that the underlying theories are wrong, but that the necessary ingredients have not yet come together to make them work. Gradually, this will change. As the dotcom advertisers go away, they tend to be replaced by bricks-and-mortar firms, many of which are among the world's largest offline advertisers. Since these firms tend to understand the value of building brands, and worry less about seeing measurable results in the short term, their arrival may move the top end of the online market closer to traditional advertising models.

Meanwhile, web-advertising rates are not falling as quickly as CPM figures would suggest; top sites can still get $30-50 per thousand views, just a few dollars short of last year's figures. Total online advertising will reach $8 billion-10 billion this year (see chart), despite the dotcom crash and America's economic malaise. That number is significant for two reasons. First, it will be at worst about the same as, or slightly above, last year's figure—not the outright collapse some have predicted. Second, this is still a very young market. The first Internet ads ran just six years ago. Despite runaway growth in the late 1990s, online advertising is still in its infancy. It represents only 3% of all advertising; radio, for instance, still attracts twice as many ad dollars.

The market's rocky start should not be so surprising. It took radio more than 50 years to reach the advertising levels of the web today. It is, however, disappointing, given the revolutionary early promise of the medium. Internet advertising will eventually find its place in the top ranks of media markets, but it will take longer to do so—and leave more dead and wounded along the way—than anyone would have guessed a year ago.